Jan 23 FT Weekend A defining moment US/China relations, Massive 2H recovery? HK politician vaccinated early and more


23 Jan

I’m going to start with the Book review section
A defining moment Resetting US relations with China will be near the top of Biden’s inbox. Three books point to the scale of the challenge ahead. By James Kynge
Looks at three books
The World Turned Upside Down: America, China, and the Struggle for Global Leadership by Clyde Prestowitz
The Great Decoupling: China, America and the Struggle for Technological Supremacy by Nigel Inkster
How China Loses: The Pushback against Chinese Global Ambitions by Luke Patey

Sets the scene with a reflection from Nixon on the US opening relations with China reflected it might have been a mistake “We may have created a Frankenstein,” he said in an interview in the aftermath of the Tiananmen Square massacre.

Clyde Prestowitz worked for Regan and offers Biden advice.
“The first thing [the new] president must do is to use his inaugural address as a wake-up call to the nation and the free world . . . to recognise the China challenge,” Prestowitz writes. “He must explain and emphasise that we are talking about the most difficult and dangerous external challenge the United States and the free world have ever faced.”
He focuses on how corporate America perpetuates the failures of US policy on China. What he calls the siren song; 'The tragic delusion that Washington allowed itself to buy into was “constructive engagement”, a notion that investing in China would foster greater freedoms in the world’s largest communist country.’ With Clinton getting China into the WTO as the greatest fantasy this it 'would mean China imported “one of democracy’s most cherished values, economic freedom”. And this, he added, “may lead to very profound change. The genie of freedom will not go back into the bottle.” With hindsight, it is clear that that particular genie was imaginary.'
China under Xi is more authoritarian than those Clinton dealt with; Xi 'in 2013 expressly banned the promotion of universal values, a free press and economic privatisation.'
So Prestowitz says the West lost the bet that globalism would not only open China unto free trade but to a liberal political environment. In fact under Xi; those forces set in motion the exact opposite effect on the political side; it used the ’surge of inward investment to bolster its technological base and strengthen its economy without liberalising its society or politics one iota.’ Before setting out what he thins the US should do now he gives 'an unsparing analysis of how Washington’s elite fell into the grip of their China delusion. “The answer, I think, is that they desperately wanted to believe for two reasons,” he writes. “One was that the corporations that largely run Washington saw huge business opportunities in China and were determined to cash in. The second was that the leading pundits and academics of the time told them it was all true.”’
He gives many examples of former US officials who ended up post Govt in corporate America where 'in their efforts to ingratiate themselves with Beijing, these influential US figures soon found themselves also doing China’s bidding. Ultimately, corporate America has become Beijing’s most potent force in Washington.’
He says they don’t do what is best for America but '“They are often thinking of what is best for their business in circumstances under which Beijing has them by the balls while they, by dint of their legally unlimited political donations to US politicians, have Washington by the balls,” He uses examples of how China put pressure on Apple and Google to delete an App that was being used by protesters; how airlines and hotel groups are forced to label Taiwan.
He suggest a series of actions directed not so much at China as at the behaviour of American companies and institutions. 'Businesses that comply with China’s interference in their freedom of speech should be fined by Washington, he says. When US company spokespeople opine on China, they should have to divulge their company’s track record in the People’s Republic.'
He also 'recommends new policies on political donations, tax, market access, monetary policy, manufacturing investment and several other areas with the aim of maintaining America’s position as the “world’s most competitive economy”.’
'In case the reader is left in any doubt over how Prestowitz sees his call to action, he writes the new president a script. The White House must make clear that national interests outweigh those of multinationals and investment banks, the author argues, adding, “and he must explain that the cold war with the Soviet Union was just a warm-up game for the main match now coming”.’

The Great Decoupling is equally chilling but more measured he 'reinforces a sense the US-led west and China are locked in a desperate struggle not only for technological supremacy but also,  in the case of the west, to preserve its liberal system.’  Inkster is a former MI6 officer; he says “China’s emergence as a powerful modern state with a different ideology and values and a long-term strategy pursued through a centralised, state-driven all-of-nation approach has raised serious questions about how fit for purpose the western liberal democratic order is in the 21st century,”
So the stage is set for a contest between China and the West and he is not certain the West will win. “A better analogy might be the relationship between Britain and Imperial Germany in 1914 that involved strategic rivalry but also an entanglement so deep that commentators at the time believed it would make war between them inconceivable,” writes Inkster. “In the event, it did not.”
Whilst not predicting war say the odds are shortening, not mentioned but on Friday China passed a law enabling its Coast Guard vessels to fire on foreign vessels in contested waters!
A middle ground is put forward by Luke Patey who puts forward that if China loses the East/West contest the fallout could be so radical that the global economy would lose out. He argues that 'China’s co-operation is crucial to the future of the global commons, particularly at a time when climate change threatens the livelihood of all humanity.’ He recommends that middle powers also have a role to play so that it is not a playoff between the superpowers. A balancing act. Push back against Chinese assertiveness but not to contain but to defer it from going too far. He aims to to “advance multilateralism to establish common rules and norms in world affairs”.
It concludes 'It is hard to give up on the hope that such a comforting future might still be possible. But Prestowitz and Inkster can muster little, if any, faith that accommodation between the west and China towards a shared prosperity is still workable. Nixon’s foreboding is starting to look more prescient, at least from a western perspective. China exhibits little inclination to take its place in a US-led international order that was not of its making.
President Biden may be obliged to accept that the days of US co-operation with China are waning and prepare to set about protecting the west’s democracy while there is still a chance.’

A good read, it seems no one expects change from China and under Xi that is difficult to see. He really believes he is there to save true communism as he see’s it. He was to an extent pushed down the hardline path by what he saw as the threat from Bo Xilai back in 2012. Since then as so often happens he has taken ever more power and less advice. With Xi being effective President for life the West has a problem and the longer he stays in power the potential for a globally shattering event increases.

FT Weekend Front Page
AstraZeneca warns EU of major hitch to Covid vaccine deliveries
• Supply-chain issues cited • Bloc already hit by Pfizer shortfall • UK leads on inoculations
Google threatens to halt search engine in Australia over pay-for-news dispute

In Side
FT BIG READ. INTERNATIONAL ECONOMICS. A ‘massive’ second-half recovery?
Optimism about the global economy is surging after China posted strong growth figures and the Biden administration promised to ‘act big’. But the rebound depends on a rapid rollout of Covid-19 vaccines.
China’s economy doing well according to recent figures and Biden promising big things for the US economy. Lagarde in Europe also expects a recovery once containment measures can be lifted. Markets have already rallied significantly from the March 2020 lows and even since Biden won the US election. Many expect that to continue though the year, which it says are built on global health, politics and economic policy. Key is the roll out of vaccinations and that they are effective; reducing the fear of stop/start policies that can cripple economies.
Quick Rebound 
Goldman’s estimates the US and UK (where vaccinations are more advanced, second only to Israel) the economic out performance will be seen as soon as Q2.It’s report says 'With Mr Biden pledging to “repair our alliances and engage with the world once again”, the immediate geopolitical backdrop is also much more favourable than under former president Donald Trump. Few expect immediate resolution of contentious international issues, and clear tensions will remain between the US and China on trade policy and across the Atlantic over corporate taxation. But the relief is palpable among officials that they no longer have to tune part of their screens permanently to Twitter in case of a sudden reversal of US policy. Ursula von der Leyen, the European Commission president, hailed a “new dawn” in relations.’
On economic policy the consensus to continue to use fiscal and monetary policy until economic recovery is confirmed is seen as positive; a view endorsed by Janet Yellen which again is viewed as positive and even if Biden’s stimulus package is watered down a little it will have a positive effect. The EU’s recovery fund os seen as having a similar effect. In China is says they have already used a large fiscal stimulus; with public investment making up for the lack of consumer spending. Central banks remain committed too.
Notes that strategists at investment bank UBS in London have advised clients to reconsider whether it is sensible to hold cash in their portfolios. “The backdrop of low interest rates and new stimulus make equity valuations look more reasonable, and we see attractive opportunities among more cyclical companies, sectors and markets,” they advised clients this week.
As the travel restrictions are removed when the pandemic is under more control the expectation is for a more powerful reflation than was seen in 2008/9 and with the average inflation rate in 5 years being over 2%.
Assuming the best
So what might go wrong. The vaccine roll outs assume herd immunity quickly and that vaccines remain effective (or can be adapted) against virus mutations. That is one assumption that could be undermined. One concern is the relaxation of social distancing post vaccination roll out if the vaccine don’t block new infections could lead to further waves of infections.
Politically whilst Biden does have control the Republicans and Democratic moderates could still raise issues.
In Europe Italian politics in again facing uncertainty as is Germany as Merkel steps down, along with the forthcoming election in Holland.
In economics too current optimism seems unrelated to reality.
China the poster child after Taiwan, has managed growth but the headline numbers mask the underlying problems; of ageing population, weak social safety net, excessive domestic saving and a renewed reliance on exports, the past year of state spending on heavy infrastructure to power its recovery all of which complicates the pre-pandemic issue that China’s need to rebalance its economy. 2021 could still be a good year for China but there are issues.
The recovery in the US and Europe may be strong but there is likely to be scarring too; it notes 'lost private investment, bankruptcies and changing behaviour that leaves some jobs in hospitality, tourism and entertainment no longer viable.’
The IMF views the global economy will be 6% smaller in 2025 than was expected pre-pandemic. That lead to the expectation of more unemployment. It notes that some global GDP has been lost forever.
Key in my view for investors is going to be sorting through countries, sectors and companies to find out those which are going to see a recovery and those where business has been lost for good. For China many manufacturing companies were given a new lease of life making medical protection equipment; that demand will not last forever at these levels; what will those companies find to do next if their historic markets are now gone? That is the big issue facing China; in addition to the re-ordering of supply chains. There are good opportunities but a lot of traps too.

Hong Kong pro-Xi politicians to get early jabs. Looks at how a number of Hong Kong’s pro Beijing politicians went into China on Friday in order to get vaccinated so as to be able to attend the National Peoples Congress in March. The reason being to try and avoid an outbreak at the meeting.  Mentions that Hong Kong has agreed to use the Sinovac Biotech, and was to have started vaccinations in January but has been delayed due to the lack of data and trials results.  That the article suggests that Hong Kong residents have a distrust of Chinese made vaccines which could hamper the roll-out in Hong Kong. It is unclear whether people will be encouraged by the politicians getting a vaccination to be vaccinated or upset with the priority given to the pro Beijing politicians.  Time will tell.
It will be interesting to see, now that Hong Kong residents are allowed to choose, whether they will prefer the BioNTech/Pfizer vaccine, the Oxford/Astra-Zeneca one or Sinovac’s

Kim faces North Korea vaccination dilemma
Dictator’s security concerns stoke fears he may block entry of overseas health workers. Looks at the outlook for North Korea and the impact that could have on the global control of the covid pandemic. To date the country has locked its borders and has supposedly contained the virus. It could be pressurised by the growing number of cases in its neighbouring Chinese provinces of Liaoning and Jilin.
The key as ever will be how secure Kim Jong Un is feeling.
The worry is that, as has been seen over the past few years, he is more than willing to sacrifice the good and well being of his people for his ambitions.
N Korea has said it's willing to participate in the WHO’s Covax programme. A crucial question being the need of international staff to access the extent of the pandemic in the country and the logistical requirements. It might also need to train local staff and notes that subsequently monitoring could be problematic. It sets out that North Korea’s is relatively well prepared to store and rollout vaccinations; as a results of participation in other global efforts to treat diseases. Also that the country has a distrust of Russian and Chinese vaccines.
Notes that Health experts have also called for sanctions on Pyongyang, imposed in response to its nuclear weapons programme, to be eased. “We have to separate the political issue from the scientific . . . this is a human thing, we cannot punish people,” Mr Shafik said.

Wall St eyes China despite continued tension with US. The latest tidings from Washington towards China suggest an already combative economic and technological rivalry between the two powers has plenty of staying power.   Yellen indicated that.  Notes that Ray Dalio thinks that China is becoming a major financial centre and will rival London and New York; especially as more funds mangers expand in or into China. Also the fact that more Chinese stocks and bonds are being added to major indices (although CNOOC suffered on Friday having been excluded).  From a current low base ownership of Chinese equities will grow.  
Bonds are growing thanks to good yields although recent scandals have muddied the waters and if inflation does breakout globally that trend may ease. The strong RMB and expectation of more strength ahead also helping.
But its not all plain sailing; governance is questionable in some cases (Arm China) and the legal system too (Arm China). High debts and rising corporate bankruptcies are issues too; especially as the provincial governments are, in many cases, unable to bail out local companies. Restructuring of the inefficient SOE’s, re-ordering of supply chains, ageing population and rising wages are a few of the issues along with government policy changes as seen with Ant Group.
Overall it is positive "“There are lots of reasons for why investors should have exposure to China; however, a lot of good news is already priced by markets,” said George Magnus, research associate at Oxford university’s China Centre.
He believes Wall Street has “a self-serving case to be bullish on China”. But in general, there is likely to be a “much more hostile global environment for China”.
This raises the risk that China changes the rules with little warning. It is welcoming global capital for now but that is not set in stone. Particularly if US-China tension heats up further.’
I agree with the sentiment that a lot of US companies and investors are self serving (see Defining Moment above). They have made big commitments and now do a lot of China’s bidding to secure their investments. For companies that have had exposure to China for some time, they are looking for the next 'China type’ markets and some are looking deeper into China. At PBP we had good links with Nanning the capital and largest city by population of the Guangxi Zhuang Autonomous Region. But it requires hard on the ground work but there are good opportunities. Others are looking to rotate out of China.
But US/China relations will be key.

Nickel’s rally powered by electric vehicle battery hype, traders warn.  Prices have rallied for Nickel and copper along with lithium but traders are concerned its more about hype than fact.   Although, in my view, that that is usually the case.  It notes that investment in Nickel new supply is significant and outlines a number of new plants. Worth noting that China is a big baker of these projects.  Also notes that investment into new copper is more limited.  Lithium is recovering but there are a number of projects that went bankrupt that are waiting in the wings should prices rise significantly.

Bitcoin on course for worst week since September as regulatory scrutiny builds.  It's had a rough week but a great three months; having been at $13,000 at the start of November; it hit $40,000 this week  but dropped back to $32,000.  It remains a contentious token but whist it is getting more investor acceptance in some quarters it is also coming under scrutiny from more regulators globally.  Certainly worth watching.  Historically it has a habit of running up in December and then selling back down.  It will be interesting to see if it does this same this year.  Also if, as people return to the office whether the trading volumes remain high.

China vaping group RLX doubles on Wall St debut  Giving exposure to possibly the largest vaping market in the world; China.  Show that US investors are still driven more by profit than politics.   There are also ESG considerations but the initial reaction seems positive.

Also a lot of articles about the new administrations approach.
Biden faces first foreign policy test with Russia balancing act
US attempts to reach out on nuclear treaty while condemning anti-west stance
Climate White House sets off on long reform journey
Opinion  The US must act like a new leader, not a returning one
Person in the News Commander-in-chief seeks to heal his divided nation  His simultaneous promises of Covid relief, structural change and restored civility will be tough to keep.

For interest
Investors will find it harder to pick the hedge fund winners. Looks at the range of performances in 2020.   Notes that 'the danger for investors is that picking a manager could easily become more about a call on markets, on value versus growth investing, or even on the future share price of Tesla.More than ever, recent past performance is unlikely to be a reliable indicator of future returns.’

Educators want exam-based learning axed
Push to ditch one-size-fits-all approach in favour of skills and independent thinking.At interesting read about changes that could occur as a result covid cancelling exams. But still thinks that exams are important because they are what we have for years relied on for making decision about people. But it may be we need to re-wire our brains about how we make decisions on people.

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